How are gasoline and oil prices linked?

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Aug. 2004 — Q: Why have the gas prices at the local gas stations not gone up in a couple of months when oil has gone up 10 to 15 percent a barrel in just the last couple of weeks? Last time oil was getting out of hand you could watch the gas stations change the prices while you where pumping the stuff? — Al O., Rockland County, N.Y.

A: Keep an eye on those pump prices, Al. The recent pullback could be temporary.

One big reason gas prices jumped this spring was that there looked like there might not be enough gasoline to go around in time for the summer driving season. (Gas prices usually rise somewhat every summer because of the increased requirements for special “reformulated” blends designed to reduce air pollution during warmer weather.)

While those high prices made it a lousy time to fill up your tank, they made it a great time to make gasoline — profits margins for refiners were huge because crude was still relatively cheap. So those refiners began cranking up production to near record levels — and they made a bundle of money by doing so. Now, with all that gasoline sloshing around the system, and the summer driving season wrapping up, prices are falling again.

But so are profit margins for refiners. If unusually cold weather this winter cranks up demand for heating oil, there will be less crude oil available to make gasoline. And if gasoline supplies get tight again, prices could head back up.

A lot depends on what happens to oil prices. So far, the recent oil price rise hasn’t yet moved through the system. But if oil prices keep rising through $50 a barrel — and stay there — the price of all refined products will go up.

What’s troubling about the current oil price run-up is that it’s not based on OPEC withholding oil. In the past, if prices rose too far, OPEC would simply pump more oil and prices would fall. But for the first time since the cartel was founded in 1960, oil producing countries are pumping as fast as they can. (At these prices, who wouldn’t?) Saudi Arabia has said it has a little spare capacity left, but so far its promises to pump more haven’t helped.

The good news is that the run-up in oil prices also seems to be coming from traders bidding up prices on fears that we may see actual shortages of oil. (Kind of like when everyone goes out before a hurricane and buys more flashlight batteries than they really need.) If the markets settle down, and political stability returns to major oil producers like Iraq and Venezuela, we’ll see oil prices fall again.